HardAssetsInvestor

Written by Sumit Roy  |

August 24, 2011

Crude Oil Report: Crude Oil Rises Despite End Of Libya Conflict; Could Take Years For Production To Resume

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Past conflicts suggest no quick fix for Libya to reach prewar production levels.

The Department of Energy reported this morning that in the week ending Aug. 19, 2011, U.S. crude oil inventories decreased by 2.2 million barrels, gasoline inventories increased by 1.4 million barrels, distillate inventories increased by 1.7 million barrels and total petroleum inventories increased by 4 million barrels.

 

 

There was no noticeable reaction in crude oil markets to the latest EIA figures. Prices were higher and continued higher after the release.

 

 

 

After a few months out of the headlines, Libya returned to the front page after rebels took decisive control of the country and the end of the Gadhafi regime drew near. While the eccentric leader still has not been captured or killed and fighting still rages in parts of the capital, most believe that for all intents and purposes, Libya’s civil war has been won by the opposition.

In and of itself, this development is bearish for crude oil. But prices have actually risen slightly since it became clear Gadhafi’s reign was coming to an end. At first glance, this price action may seem counterintuitive. The end of the Libyan conflict means that the OPEC member will likely soon be resuming its 1.55 mmbbl/d of production that was shut down during the war. More supply is bearish for prices.

Longer term, that may be the case, but in the near term, the market does not have confidence that a meaningful amount of oil will enter the market despite the fall of Gadhafi. Potential damage to infrastructure, internal discord among rebels, lengthy contract negotiations with private oil companies and a host of other possibilities means that it will likely be many months, if not years, before production reaches its preconflict levels.

According to data from the Energy Information Administration, it took more than three years for Kuwait’s production to return to levels seen before the invasion by Iraq. And that was one of the fastest instances of recovery, as can be seen from the chart below.

 

 

With most if not all of Libya’s production still offline in the near term, crude oil will likely stay elevated. The International Energy Agency’s 60-million-barrel emergency stockpile release is coming to an end and the market will be especially tight in the coming months.

Over the past several weeks, prices have been taking their cues from movements in stock markets as global economic concerns remain foremost on traders’ minds. The S&P 500 has so far managed to bounce off that key 1100 support level again this week, and we’ve seen a corresponding bounce in oil prices. The strong correlation between stocks and oil is likely to continue in the short term.

 

 

Turning to this week’s EIA inventory figures, total petroleum inventories in the U.S. increased by 4 mmbbl, above the 2 mmbbl five-year average. In turn, the surplus over the five-year average increased to 21.7 mmbbl, or 2 percent.

 

 

 

Crude oil inventories fell by 2.2 mmbbl, which is better than the five-year average of a 0.6 mmbbl increase. However, without the release of 4.8 mmbbl of crude oil from the strategic petroleum reserve, inventories would have declined by 7 mmbbl. Over the last four weeks, the government has sold 20 mmbbls of crude from the SPR out of the 30 mmbbls it is expected to sell based on the IEA directive. Once these sales are complete, inventories may get much tighter.

Despite SPR release, the surplus over the five-year average in the crude category decreased to 16.9 mmbbl, or 5.1 percent. Regionally, inventories inside and outside the Midwest fell.

 

 

 

 

Gasoline inventories rose by 1.4 mmbbl against the five-year average of a 0.8 mmbbl decline. The surplus in the category stands at 5.9 mmbbl, or 2.9 percent. Distillate inventories increased by 1.7 mmbbl against the five-year average of a 1 mmbbl build. In turn, the surplus in the category rose to 8.2 mmbbl, or 5.6 percent.

 

 

 

 

Demand

Total petroleum demand in the U.S. fell slightly week-over-week, but on a four-week rolling basis, total demand was actually up by 1.4 percent year-over-year. Gasoline demand was down 2.4 percent and distillate demand was up 8.3 percent.

 

 

 

 

 

Imports

Crude oil imports fell by 0.5 mmbbl/d week-over-week to 8.8 mmbbl/d. On a four-week rolling basis, imports have been 0.5 mmbbl/d below the year-ago level.

 

 

 

 

 

Refinery Activity

Refinery utilization ticked up to 90.3 percent from 89.1 percent. Utilization is close to the five-year average and the year-ago level. Gasoline production rose slightly to 9.3 mmbbl/d. Distillate production rose to 4.7 mmbbl/d — the highest since July 2008.

 

 

 

 

 

Miscellaneous

U.S. crude oil production rose slightly to 5.6 mmbbl/d. Output remains near seven-year highs thanks to surging production in unconventional oil plays. Year-to-date production is up 2 percent year-over-year.

 

 

Inventories at the NYMEX delivery point in Cushing, Okla., were essentially unchanged at 33.7 million barrels, or 58 percent of the EIA’s estimate of capacity. Overall, Midwest inventories fell 0.6 million barrels to 93.8 million barrels, or 75 percent of estimated storage capacity.

Front-month WTI calendar spreads widened week-over-week to -0.36.

West Texas Intermediate’s discount to Brent rose week-over-week to -$24.67 from -$22.87. Earlier in the week, the spread hit a record of -$26.48. WTI’s discount to Louisiana Light Sweet fell to -$20.15 from -$21.65 last week.

The extremely steep discount for WTI versus other benchmarks has been discouraging storage in Cushing. With inventories in the hub falling swiftly, it will be interesting to see if this eventually leads to a narrowing of the WTI discount.